Question

Coastalview magazine issued $600,000 of 15-year, callable bonds payable on July 31, 2024, at 94. On July 31, 2027, Coastalview called the bonds at 101. Assume annual interest payments.

Option 1: The bonds were called because the interest rates increased significantly.
Option 2: The bonds were called at a premium because interest rates decreased.
Option 3: The bonds were called at a discount because interest rates increased.
Option 4: The bonds were called because of a change in the company's credit rating.

Answer 1

When interest rates increase, bond prices decrease. The actual price you would be willing to pay can be calculated using the present value calculation.

Step-by-step explanation:

In this scenario, the question is asking about the impact of a change in interest rates on the price of a bond. When interest rates increase, bond prices decrease, and when interest rates decrease, bond prices increase. Therefore, in this case, with an increase in interest rates from 6% to 9%, you would expect to pay less than $10,000 for the bond. To calculate the actual price you would be willing to pay, you can use the present value calculation. The present value of the bond would be the sum of the present value of the interest payments and the present value of the principal payment.